T-Mobile LTE: How is that going to work?

Number four U.S. mobile carrier T-Mobile is attempting to shake off the dust of the abandoned takeover effort from AT&T, announcing a revamped “Challenger Strategy” that is intended to make the carrier more competitive against the likes of Sprint, AT&T, and the top U.S. mobile operator, Verizon Wireless. Of course, being competitive in the mobile market these days means moving towards 4G LTE technology — and that’s exactly what T-Mobile says it’s going to do, announcing plans to begin deploying LTE services in 2013. Furthermore, T-Mobile is going to re-jigger its network, drastically cutting back services for its 2G/EDGE customers in order to boost its HSPA+ high-speed broadband offerings — and, in so doing, make its network more interoperable with AT&T. That, in turn, could pave the way toward T-Mobile eventually being able to offer Apple’s iPhone.

How can a carrier who famously got shut out of the FCC’s 2008 spectrum auction for mobile broadband frequency licenses — and which is hemorrhaging customers because it can’t offer an iPhone — hope to be a “challenger” in the LTE world? And will having LTE in 2013 be too little, too late?

AWS spectrum from AT&T

The irony of T-Mobile’s revised “Challenger Strategy” is that its core components will be fueled by assets T-Mobile is picking up as concession prizes for AT&T’s aborted takeover attempt: $3 billion in cash, and licenses to about $3 billion worth of AWS (Advanced Wireless Services) spectrum licenses throughout the United States. T-Mobile plans to sink all that money (and more) into network modernization and rolling out new equipment to some 37,000 tower sites. The AWS spectrum is also a big help to T-Mobile, which is by far the most spectrum-constrained of the four nationwide mobile carriers operating in the United States.

Here’s what T-Mobile plans to do: First, it plans to devote the new AWS spectrum acquired from AT&T exclusively to LTE service; T-Mobile expects it will be able to to roll out LTE service to most of the top 50 mobile markets in the United States, with about three quarters of the top 25 markets getting a full 20 MHz of bandwidth devoted to LTE. In theory — and those are key words — that could put T-Mobile’s LTE performance on par or above LTE services from other carriers in some major markets, offering data speeds of up to 72Mbps. Although Verizon, AT&T, and Sprint are all working to roll out LTE in the same places, only Verizon is in a good position to devote 20 MHz of bandwidth in many major markets.

Of course, there are caveats. The AWS spectrum licenses T-Mobile is acquiring from AT&T are all in the 1700 MHz band. If that band were ideal for rolling out nationwide LTE services, AT&T would have done exactly that and not bothered with attempting to acquire T-Mobile at all. The 1700 MHz band does not do a good job of propagating through buildings and urban environments, meaning reception indoors and in many urban areas will be spotty and unreliable unless T-Mobile rolls out a truly massive number of tower sites in those areas. This frequency issue is a primary reason why AT&T didn’t move to roll out LTE in that AWS band, and why Verizon, AT&T, and Sprint are all focusing their LTE services in the 700–800MHz spectrum blocks: those frequencies do a good job penetrating buildings. That characteristic is part of what makes 700 MHz spectrum licenses held by cable companies worth $3.6 billion to Verizon, and why the FCC’s just-announced plans to re-organize UHF television and auction off 600 MHz spectrum blocks in the next year or two has mobile providers salivating. In short, by 2013 T-Mobile may be able to offer LTE services, but customers might have to step outside to use them.

Another factor is that the AWS licenses do not cover all the major U.S. mobile markets, meaning there will be some significant markets where T-Mobile’s LTE services will be very weak or non-existent unless the company can supplement its network with additional spectrum acquisitions. T-Mobile may be able to offer LTE, but it won’t be able to offer LTE everywhere it operates.

Although industry watchers don’t expect any problems, it’s worth noting that AT&T’s transfer of AWS licenses to T-Mobile still has to be approved by the FCC.

“Re-farming” PCS spectrum

But wait: doesn’t T-Mobile already offer “4G” services? That’s true after a fashion. T-Mobile has essentially hotwired its HSPA+ service, using frequency multiplexing technologies to push its HSPA+ speeds as high as 42 Mbps. That potential bandwidth compares very favorably with what’s available to users of 4G WiMax services over on Clearwire and Sprint, so T-Mobile jumped on the marketing bandwagon and started calling their services 4G too, arguing “4G” is about bandwidth, not the particular technology underlying it.

(From a technical perspective, neither HSPA+ nor the “4G” flavors of WiMax and LTE currently being deployed by mobile operators are true 4G — that’ll have to wait for versions of LTE based on the IMT-Advanced spec, which offers up to ten times the bandwidth of existing LTE technology.)

Of course, this leaves T-Mobile in a bit of a lurch with phone makers. Since their version of HSPA+ is unique, that means phones and other devices have to be specifically built to support it. This is the primary reason why T-Mobile cannot offer its customers an iPhone: Apple doesn’t make one that works on T-Mobile’s HSPA+ network. Customers who have brought unlocked iPhones to T-Mobile’s network face a sad mobile bandwidth situation: the devices drops down to 2G EDGE-based connectivity, just like the original iPhone back in 2007.

To address these issues, T-Mobile has also announced it plans to “re-farm” the services it offers on its 1900 MHz PCS (Personal Communications Services) spectrum holdings. Rather than running old-school HSPA and EDGE services on those frequencies, T-Mobile is going to shift the majority of its stations to run HSPA+, instead.

This move has two primarily advantages for T-Mobile. First, it will enable the company to expand its HPSA+ offerings at the same time it’s beginning to roll out LTE services, so T-Mobile’s other flavor of “4G” will generally become more available to customers. (As part of the transition, T-Mobile plans to install network gear using antennas integrated with the radios in their towers, which should boost output power for 1900 MHz HSPA+ service by about 16 percent, increasing coverage and making it a bit more reliable.)

Second — and perhaps more importantly — shifting to HSPA+ services in the 1900 MHz block will also make T-Mobile’s network compatible with HSPA+ devices designed for AT&T’s network — and that means iPhones. T-Mobile is the only major U.S. carrier that doesn’t offer an iPhone, a fact for which the company blamed its loss of over 800,000 contract customers last quarter. Although T-Mobile has not announced any deal to carry an iPhone, shifting its network to offer HSPA+ in the 1900 MHz block means Apple wouldn’t have to build a special iPhone just for T-Mobile; existing units that operate on AT&T’s network (the iPhone 3G, iPhone 4, and iPhone 4S) could all work.

In the meantime, however, dogged T-Mobile customers who have brought unlocked iPhones over to T-Mobile’s network could actually see their quality of service decline as T-Mobile begins to shut off EDGE service and transition to HSPA+. And that’s not an insignificant number of people: last September, T-Mobile admitted it had over a million customers using unlocked iPhones on its network — that’s three to four percent of its entire customer base. Folks who are still limping along on older T-Mobile devices that rely on EDGE will also see their service decline.

The business case for T-Mobile

Altogether, T-Mobile’s revamped “Challenger Strategy” outlines a way for T-Mobile to keep its head above water — a considerable challenge in the face of the billions of dollars the likes of Verizon, AT&T, and Sprint are willing to invest in their own 4G networks, plus the fact that T-Mobile USA parent company, Deutsche Telekom, doesn’t want to put any more money into T-Mobile. In short, T-Mobile has come up with a way to use the assets its gaining from AT&T to jump into the world of LTE services. Before AT&T loomed large on T-Mobile’s horizon, the company had no clear path to LTE, so arguably T-Mobile is in a far better position now than before the takeover attempt.

Another good business aspect of T-Mobile’s LTE strategy is that it doesn’t put the company at anybody’s mercy. T-Mobile is building out its own facilities and services, which it will operate on their own. If T-Mobile had opted instead to cut a deal with would-be wholesale LTE operators like Clearwire or LightSquared, its fortunes would be inexorably bound to that provider. In the case of LightSquared, that could be disastrous, as it’s looking like LightSquared may never activate service. Similarly, Clearwire is majority owned by (and heavily dependent upon) mobile competitor Sprint. Although Sprint would love to see T-Mobile as an LTE customer, T-Mobile is understandably loathe to put its 4G fate in Sprint’s hands.

However, T-Mobile’s strategy doesn’t preclude deals: there’s still some speculation T-Mobile could team with Dish Network to offer satellite-assisted LTE services. But given LightSquared’s woes, Sprint is probably looking at Dish as a possible partner too.

The real question for T-Mobile is whether it can hold on until some time in 2013, when its network revamp and LTE devices (the company says it’ll have ten to start with) begin to become available to consumers. As mentioned, T-Mobile lost over 800,000 contract customers in total last quarter, a loss nearly 220 percent higher than the previous quarter. (The company did see an uptick in prepaid customers that somewhat offset the loss.)

T-Mobile attributes that downturn to the launch of the iPhone 4S on the three other major U.S. carriers, but it amounts to a loss of about 1.6 percent of T-Mobile’s customer base in a single quarter — this after nine months of uncertainty surrounding the AT&T acquisition. If customer losses continue at the new pace (the iPhone 4S isn’t going anywhere), T-Mobile’s overall customer base will be 10 to 12 percent smaller when it begins to roll out 4G LTE services.

And, even when T-Mobile’s revamps HSPA+ and LTE services are available, they’re likely not going to be able to compete with coverage and availability offered by the likes of Verizon Wireless and AT&T.

The upshot? T-Mobile had better hope the iPhone retains its market dominance — and that it can start offering an iPhone to customers sooner than later.